Berkshire’s Board Treats Buffett to a Whitewash: Jonathan Weil

May 5 (Bloomberg) -- The resounding condemnation of David
Sokol by Berkshire Hathaway Inc. is proving to be as strange as
its initial pseudo-exoneration of him.

Last week Berkshire released an 18-page report by its audit
committee, detailing the findings of the panel’s investigation
into Sokol’s trading in Lubrizol Corp. Sokol, you may recall, is
the former chairman of several Berkshire units who resigned in
March amid revelations he bought about $10 million of Lubrizol
shares shortly before he recommended successfully to Warren
Buffett that Berkshire buy the company.

The audit committee, which consists of three
“independent” directors, concluded Sokol had violated
Berkshire’s insider-trading policies and code of ethics, an
allegation he denies.

The report itself, however, was anything but independent.

Rather than hire its own separate legal counsel, as the
company’s charter authorizes it to do, the audit committee
relied on Berkshire’s longtime law firm, Munger, Tolles & Olson,
to help conduct its probe and prepare the report. And the
committee allowed Ronald Olson, a Munger Tolles partner and
Berkshire director who isn’t independent of the company’s
management, to act as its public spokesman, all of which
underscores weaknesses in Berkshire’s own corporate governance.

Unexplored Issues

A truly independent, no-holds-barred report would have
delved into whether Buffett, Berkshire’s chairman and chief
executive, made any incorrect or misleading statements in his
March 30 letter to shareholders announcing Sokol’s resignation.
It also would have addressed the advice Buffett received from
Olson and any other Berkshire directors in drafting that letter,
which Berkshire disclosed as part of a company press release.

As Berkshire’s code of business conduct and ethics says,
all officers and directors involved in preparing communications
to the public “shall make disclosures that are full, fair,
accurate, timely and understandable.”

The report by the audit committee, led by former Capital
Cities/ABC Inc. chief Thomas Murphy, didn’t address whether the
statements in Buffett’s March letter lived up to that standard.
The main reason Buffett has received so much harsh criticism
lately is that lots of people seem to believe they didn’t.

‘No Conflict’

Olson, in an interview, told me he saw no problem with
serving as a Berkshire director at the same time he’s an outside
lawyer for both Berkshire and its audit committee. “There’s no
conflict in our operating on behalf of the audit committee as
their lawyers, and we did it,” he said. “I don’t see that
being inconsistent with my role as a director in any way.”

Yet Olson seemed stumped when I asked him how he keeps his
activities as a director and lawyer for the same company
separate; essentially Olson is his own client. “I’m not going
to go into detail about all of this,” he said.

If the owners of a closely held company want to put its
outside attorney on the board, fine, that’s their business.
Berkshire, however, has public responsibilities. Olson and
Munger Tolles should have told Berkshire’s audit committee to
hire its own independent counsel to assist with its inquiry into
the Sokol affair, says James Cox, a securities-law professor at
Duke University School of Law.

Failing Grade

“In these high-profile matters, communicating that you are
independent and that you are acting independently is the
ultimate message and not the report itself,” Cox told me. The
audit committee’s members “should have managed that, and they
failed.”

Buffett’s March 30 letter, in which he praised Sokol
profusely, provided plenty of material for the committee to
examine. For example, Buffett opined that none of Sokol’s
Lubrizol purchases “were in any way unlawful,” a statement
that was incomplete at best.

Buffett’s letter said nothing about whether Sokol’s trades
violated Berkshire’s internal policies. Buffett later said they
did. Nor did it mention that, on that same day, Berkshire
reported Sokol’s trades to the Securities and Exchange
Commission’s enforcement division. Berkshire “turned over some
very damning evidence,” Buffett said at Berkshire’s annual
shareholder meeting last weekend.

In his March letter, Buffett also wrote that Sokol had said
his Lubrizol purchases “were not a factor in his decision to
resign,” a line that wasn’t remotely credible. It wasn’t until
a month later, at last weekend’s annual meeting in Omaha,
Nebraska, that Buffett said Sokol’s trades were a firing
offense.

Not So Clever

Buffett also said last week that he consulted with Olson
and Berkshire Vice Chairman Charlie Munger after he wrote a
draft of the March letter. The audit committee’s report didn’t
address the advice they gave him. Instead the committee limited
the report’s scope to Sokol’s conduct alone.

Munger did tell shareholders over the weekend: “I think we
can concede that that press release was not the cleverest press
release in the history of the world.” That’s far too kind.

Berkshire’s audit committee had the opportunity to provide
a full accounting of what went wrong. Instead its members lent
their names to a whitewash that ignored the most important
question: Whether Buffett or anyone else on Berkshire’s board
may have violated the company’s ethical standards.

Maybe that’s because they didn’t like the answer.

(Jonathan Weil is a Bloomberg News columnist. The opinions
expressed are his own.)